This is the post for Canadian businesses. You can find the U.S. post here.
Learn the Basics of Payroll Remittances and When They're Due
As an employer in Canada, the Canada Revenue Agency (CRA) requires that you remit (file) payroll taxes accurately and on time. In this post, we'll outline the types of payroll deductions you need to make, along with which kind of remittance schedule you’ll need to follow. As advocates of simple, fast, friendly payroll, we’ll do our best to try to make this as painless as possible.
Who Wrote the Book on Payroll Remittances (Source Deductions)?
That would be the CRA. The definitive guide is called T4001 Employers' Guide — Payroll Deductions and Remittances and is available in HTML or as a PDF. On the first read through, it’s kind of like putting together Swedish furniture. But, don’t worry, our job as payroll experts is to help you get your payroll remittances (source deductions) completed correctly and on-time in order to keep you and the government happy.
What Are Payroll Deductions and Remittances?
“As an employer, you have to remit the CPP contributions, the EI premiums, and income tax deducted from your employees' income, along with your share of CPP contributions and EI premiums.” – CRA
What does this mean? In English, it means that as an employer, an entity that pays salaries and provides benefits to employees, you are required to calculate, deduct and remit the following source deductions each time you issue payroll:
- Deductions (withholdings) based on the income earned by each employee, including:
- Canada Pension Plan (CPP) contributions — 4.95% up to a yearly maximum.
- Employment Insurance (EI) premiums — up to a yearly maximum.
- Income tax — based on provincial or territorial rates, which are determined by whether or not the employee reports to your business establishment. (For more information, see the important notes in the next section.)
- Your share (the employer’s portion) of:
- Employer CPP contributions — must match the amount deducted from each employee’s contribution.
- Employer EI premiums — 1.4X the amount deducted from each employee’s premium.
If you're a visual learner, the CRA has a video on deducting CPP contributions and EI premiums.
Important Notes on CPP, EI and Income Tax Deductions
- There are no age requirements or restrictions for EI or income tax.
- Employers may be able to reduce their employer EI premiums by offering short-term disability coverage.
- CPP must be deducted for any employee:
- Aged 18-70 (Employees aged 65-70 may submit Form CPT30, Election to Stop Contributing to the Canada Pension Plan, or Revocation of a Prior Election to be considered exempt.)
- Engaged in pensionable employment — any role for which a pension fund has been established.
- Who is not considered disabled.
- Employment income and the establishment of the employer
- Wages, salaries and commissions are all considered employment income.
- The establishment of the employer is any place or premises in Canada that is owned, leased or rented by the employer and where one or more employees report to work or from which one or more employees are paid.
- It does not have to be a permanent, fixed location (such as in the case of construction sites and similar transient/changeable locations) and there is no minimum for the amount of time that the employee has to report to this location.
- If employees work from home, the location is determined by the territory or province in which the payroll is issued.
- The CPP and EI tables cited in this post are valid for 2016 and subject to renewal and/or revision by the CRA in 2017. To receive updates from the CRA, subscribe to their Business Tax Information Newsletter.
Calculating Payroll Tax Deductions
On its website, the CRA provides a Payroll Deductions Online Calculator (PDOC). However, the instructions are a page long.
There Has Got to Be a Better Way…
You’re right. That’s why simple, online payroll solutions, like Wagepoint, were created specifically for small businesses. When you use online payroll software like ours, we calculate the deductions for you — saving you time and preventing frustration.
Knowing Which Remittance Schedule to Follow
As a business, your remittance schedule for payroll deductions is determined by your average monthly withholding amount (AMWA) — the sum of all the payroll deductions you paid to the CRA within a calendar year, averaged on a monthly basis. A two-year history of your AMWA is used to classify you as a new, regular, accelerated or quarterly remitter.
You are a new remitter if you:
- Are a new employer or have never made remittance payments before.
As a new remitter, your payments are due the 15th day of the month following the one in which you made the deductions.
Note: As of 2016, small businesses may qualify as quarterly remitters.
You are considered a regular remitter (non-accelerated remitter) if you:
- Are a new employer with less than two year’s of AMWA history
- Have a two-year AMWA of less than $25,000
Remittances/payments for regular remitters are due the 15th day of the month following the one in which you made the deductions.
There are two categories of accelerated remitters:
- Threshold 1 — Employers with two-year AMWA of $25,000 – $99,999.99
Remittances/payments for Threshold 1 remitters are due the 25th day of the same month for payroll processed in the first 15 days of the month. For payroll processed after the 16th day of the month, remittances/payments are due by the 10th day of the following month.
- Threshold 2 — Employers with a two-year AMWA greater than $100,000
Remittances/payments for Threshold 2 remitters are due no later than the third working day (not counting Saturdays, Sundays, or public holidays) after the 1st-7th, 8th-14th, 15th-21st and 22nd-last day of the month. In other words, no later than the 3rd business day after the week in which the payroll was processed.
Threshold 2 remitters are also required to make remittances/payments through a financial institution at least one full day before the due date in order to prevent fines.
Small businesses may qualify as quarterly remitters if they:
- Have an AMWA of less than $3,000 in the previous two years.
- Have a perfect compliance history with the CRA.
Remittances/payments for quarterly remitters are due on or before April 15, July 15, October 15, and January 15 for payrolls processed in the previous quarters.
Quarterly remitters are subject to annual reviews by the CRA in order to retain this status. If your status is changed, you will be notified by mail.
Making Your Remittance Payments On Time
The process of remitting payments includes the use of:
- Form PD7A, Remittance Voucher – Statement of Account for Current Source Deductions for regular, quarterly and monthly remitters.
- Form PD7A(TM), Remittance Voucher – Statement of Account for Current Source Deductions, or Form PD7A-RB, Remittance Voucher for accelerated remitters.
Payment methods include:
- Online or by phone.
- By Visa® Debit or Interac® using the CRA’s My Payment service.
- Pre-authorized debit.
- Third-party service providers, like a payroll company.
- At a financial institution, using a personalized remittance voucher.
- By mail to Canada Revenue Agency, 875 Heron Road, Ottawa ON K1A 1B1 — cheque only, do not send cash.
- Put reminders in your calendar or use the CRA’s reminder app for small businesses, available for iPhone and BlackBerry.
- You could use payroll software... we're just sayin'.
If You’re an Employer in Quebec
Quebec has its own provincial pension plan, the Quebec Pension Plan (QPP), provincial income tax and the Quebec Parental Insurance Plan/Provincial Parental Insurance Plan (QPIP/PPIP). If you have employees in Quebec, you must deduct these payments and remit them to Revenu Québec. However, EI and federal tax deductions go to the CRA. Fun, right? Remember, if you use the right payroll software, this can be done automatically.
Best Practices to Prevent Remittance Errors and/or Penalties
Your payroll deductions (source deductions) must be held in trust in a separate account from your normal operating account. Missed or late payments will result in fines along with daily compound interest on any outstanding balance of $500 or more.
The CRA’s current penalty structure is:
- 3% if your payment is 1-3 days late.
- 5% if your payment is 4-5 days late.
- 7% if your payment is 6-7 days late.
- 10% if your payment is more than 7 days late or if your fail to pay at all.
- 20% for repeat failures and violations.
In general, if you notice a problem or have questions, it’s best to contact the CRA directly by connecting to an agent online or calling 1-800-959-5525.
Why DIY is Not A-OK
In her blog post, The Top Seven Bookkeeping Mistakes Made by Small Businesses, entrepreneur and Brunning & Company owner, Shannon Brunning lists DIY bookkeeping as one of the seven deadly sins. She writes that money spent consulting a professional and investing in payroll software will “come back to you several times over.”
In their blog post, Five Costly Payroll Mistakes to Avoid, McLenehan and Associates Chartered Professional Accountants, puts failing to remit payroll deductions on time at the top of the list. “When it comes to payroll deductions CRA considers you to be holding that money in trust on behalf of the government. You aren’t remitting YOUR money, you’re remitting THEIR money.”
Disclaimer: The advice we share on our blog is intended to be informational. It does not replace the expertise of accredited business professionals.